This legal opinion addresses the fundamental issue of:
Whether the expropriation of legitimately earned assets owned by Russian investors is legal, where host countries have not provided compensation?
The Russia/Ukraine Conflict was triggered by a confluence of many foreseen and some unimaginable circumstances. The reaction of many host countries to seize assets owned by Russians earned through legitimate means is illegal and contrary to international law.
The 1974 Charter of Economic Rights and Duties of
States outlines as follows:
Article 2: Each State has the right:
(a)To regulate and exercise authority over foreign investment within its national jurisdiction in accordance with its laws and regulations and in conformity with its national objective and priorities. No State shall be compelled to grant preferential treatment to foreign investment.
However, Article 2(C) is particularly instructive.
Article 2 (C) stipulates – To nationalize, expropriate or transfer ownership of foreign property, in which case appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the State considers pertinent. In any case, where the question of compensation gives rise to a controversy, it shall be settled under the domestic law of the nationalizing state and by its tribunals unless it is freely and mutually agreed by all States concerned, that other peaceful means be sought on the basis of sovereign equality of states and in accordance with the principle of free choice of means.
It is without dispute that the Charter requires payment of appropriate compensation, albeit in accordance with national law rather than international law, to foreign investors affected by expropriation and nationalization.
Further, The UN Draft Code of Conduct for Transnational Corporations, in its provision on expropriation and nationalization reads as follows:
“It is acknowledged that States have the right to nationalize or expropriate the assets of a transnational corporation operating in their territories and that adequate compensation is to be paid by the State concerned, in accordance with the applicable legal rule and principles.”
In addition, The 1976 Declaration of the OECD on International Investment and Multinational Enterprises includes Guidelines for Multilateral Enterprises. Encouraged by the 1992 Guidelines of the Joint Development Committee of the World Bank and the IMF, the OECD sought to conclude a Multilateral Agreement on Investment in 1998.
The Multilateral Agreement on Investment on the issue of expropriation and compensation notes as follows:
“A Contracting Party shall not expropriate or nationalize directly or indirectly an investment in its territory of an investor of another Contracting Party or take any measure or measures having equivalent effect (hereinafter referred to as ‘expropriation’) except:
(a) for a purpose which is in the public interest;
(b) on a non-discriminatory basis;
(c )in accordance with due process of law, and
(d) accompanied by payment of prompt, adequate and effective compensation in accordance with Articles 2.2 and 2.5
Article 2.2- Compensation shall be paid without delay
Article 2.3- Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation occurred. The fair market value shall not reflect any change in value occurring because the expropriation had become publicly known earlier.
Article 2.4- Compensation shall be fully realizable and freely transferable.
In the instant case, the issue of compensation has not been addressed. Articles 2.2 – 2.5 at the lowest interpretation, gives a clear indication of the mindset of the OECD member states at the time. It however appears by today’s actions of host States to confiscate legally earned assets of Russians, that the perspective to compensate is only applicable in the context of defending an investor in the expropriation of assets, when the host country is a developing country without economic and military might. Note that this opinion makes a clear distinction between licit and illicit earnings.
It is noteworthy, that if the scenario was one in which a South Amerian country seized assets of European investors, because of the current conflict between that particular European country, as it relates to the failure to pay reparations for genocide against the indigenous people of the Caribbean and the enslavement of Africans, it would be very interesting, how both the international court of public opinion and the ICJ would appreciate these circumstances.
In addition, the concept of fair and equitable treatment is a major, if not the most important principle of foreign investment law, and is deeply rooted in customary international law. The violations of the fair and equitable treatment principle by the host states concerned is the most common allegation made by foreign investors before international investment tribunals. When States began to conclude Bilateral Investment Treaties as the principal vehicle to regulate and promote foreign investment, this principle was incorporated as a critical provision.
The seizure of the assets owned by Russians obtained through legitimate means without compensation is both unfair and inequitable.
In the cases of Nobles Ventures v Romania, ICSID ARB/01/11 of 12 October 2005, USA (LF Neer) v United Mexican States (1927) 21 AJIL and Waste Mangement Inc v. Mexico A/F/00/3, “the jurisprudence is clear that at a minimum the standard of treatment of fair and equitable treatment is infringed by conduct attributable to the state and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety –as might be the case with manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process. In applying this standard, it is relevant that the treatment is in breach of representation made by the host State which was reasonably relied on by the claimant.”
The purpose of this phrase seems to be to prevent ‘arbitrary’ and ‘discriminatory’ treatment of foreign investors by a host state. The term ‘arbitrary’ itself was defined by the ICJ in the ELSI case as “a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of judicial propriety (Case Concerning Elettronica Sicula SpA (ELSI) (United States v Italy), ICJ Reports, 1989 para 128.
It must be clearly noted that this opinion does not question the ability of the host country to seize the assets of the foreign investors in this case, Russian investors. The issue contested is the illegality of the actions of host countries acting outside of a prompt discussion of compensation. After receiving foreign investment, a host state may change its mind and wish to reverse the situation. A state can reverse the situation by requiring that the foreign investor leaves the country or by expropriating such an investor’s assets in a manner as prescribed by international law.
It is settled international legal jurisprudence that a sovereign state is always entitled to ask foreign investors to leave or to expropriate the assets of foreign companies by paying compensation in a manner prescribed by international law and according to Bilateral International Treaties.
International law imposes certain restrictions on the exercise of economic sovereignty by states. By the very act of inviting and admitting foreign investors into the country, the state concerned voluntarily accepts limitations on its sovereignty and subjects itself to the rules of international foreign investment law.
Accordingly, any taking of the assets of a foreign company without lawful compensation is illegal and amounts to confiscation.
Caribbean host countries should be advised that the region being well known as a “Zone of Peace”, should avoid being drawn into a global conflict as it relates to shattering its existing relationships with legitimate Russian and other investors.
Post the pandemic and the Russia/Ukraine conflict the Caribbean region must embark on a growth part in which foreign direct investment must play a role of critical importance.
The expropriation of the legitimately earned assets of Russians should not come within contemplation. This condemnation is equally applicable if the Russian Government decides to seize assets from Western investors currently located in Russia, in which case the Russian government must provide compensation in the same terms outlined in this opinion.
For sure this Conflict will impact heavily on the evolution of the jurisprudence of international investment law. It is envisaged that host countries will have far more questions to address on the issue of the protection of assets of foreign investors before such investments are made in the future. This can lead to one of the most undesired financial impacts on developing countries, which can be starved for foreign direct investment if they do not now invest millions in ensuring that they can provide the legislative framework to give greater comfort to foreign investors regarding the security of their investment. Further, when one adds the necessity of political stability to the mix, the taboo of political instability in some developing countries will not help the case of many small island developing states seeking to attract foreign direct investment.
Under international law, for an expropriation of assets to be lawful, it must be:
(i)non-discriminatory (not targetting investors of a certain nationality unless covered by legitimate sanctions measures);
(ii) in accordance with law;
(iii) respecting due process; and
(iv) accompanied by prompt, adequate and effective compensation (the customary international law standard for compensation).
I wish for an end to the Russia/Ukraine Conflict and conflicts globally.
The next article will focus on remedies available to Russian investors whose assets have been illegally confiscated.
It is premised on the rules of customary international law that compensation must be prompt, adequate and effective and that legitimate Russian investors cannot be targeted indiscriminately.
Al C. Elliot is a trained attorney in the Caribbean with active practices in St. Lucia and St. Vincent and the Grenadines. He is a graduate of the University of the West Indies, Faculty of Law, Cave Hill Campus, Barbados and the Hugh Wooding Law School, Trinidad and Tobago.
His period of practice spans 17 years and has included foreign investment and criminal law.
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